In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, July 08, 2013

Reis: Office Vacancy Rate unchanged in Q2 at 17.0%

by Calculated Risk on 7/08/2013 11:03:00 AM

Reis released their Q2 2013 Office Vacancy survey this morning. Reis reported that the office vacancy rate was unchanged at 17.0% in Q2.

From Reis Senior Economist Ryan Severino:

Vacancy was unchanged during the second quarter at 17.0%. This is a nominal slowdown from the prior quarter's 10 basis point decline in vacancy. However, the reality of the situation is that the decline in vacancy on a quarterly basis since the market began to recover in mid‐2011 has been unable to exceed just 10 basis points. So calling this quarter a slowdown, while technically true, is a bit hyperbolic. On a year‐over‐year basis, the vacancy rate fell by a scant 30 basis points. With the labor market unable to generate significant office‐using employment, demand for space remains enervated. Without even modest demand, the decline in the national vacancy rate will not accelerate. National vacancies remain elevated at 450 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December.
emphasis added
On new construction:
Occupied stock increased by 7.230 million SF in the second quarter. While this is technically an increase versus last quarter's 3.933 million SF of net absorption, it originates from the 7.594 million SF that were completed during the quarter. Sans this construction‐related absorption, there is little to no demand for space in existing buildings in the market. Clearly, the market is favoring new space at the expense of old space at this juncture. Nonetheless, it is somewhat heartening to see a bit of an increase in new construction activity. The market has not delivered as much new space since the second quarter of 2010 when many projects were completed only because they had been started before anyone fully grasped the magnitude of the Great Recession. Auspiciously, this quarter's mini‐spike in construction activity comes hot on the heels of last quarter's scant 2.191 million SF of new office space, the lowest quarterly figure for new completions since Reis began publishing quarterly data in 1999.
On rents:
Asking and effective rents both grew by 0.4% during the second quarter. This is now the second quarter in a row that both asking and effective rent growth have slowed. 0.4% for both metrics is about on par with the quarterly average growth rate since rents began rising consistently in the fourth quarter of 2010. Asking and effective rents have now risen for eleven consecutive quarters. Yet, the cumulative growth in asking and effective rents during this 11‐quarter recovery period is only 4.7% and 5.4%, respectively. For comparison's sake, the office market is able to produce that kind of rent growth in typical calendar‐year periods. Rents remain below peak levels set in 2008. Without stronger demand, it will take years to return to those levels.
Office Vacancy Rate Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate was unchanged in Q2 at 17.0%, and down from 17.3% in Q2 2012. The vacancy rate peaked in this cycle at 17.6% in Q3 and Q4 2010, and Q1 2011.

As Severino noted, construction picked up in Q2 (more office space was delivered) and this kept the vacancy rate from falling.

Office vacancy data courtesy of Reis.